Education, Self-Selection and Intergenerational Transmission of Abilities

Abstract

This paper shows that the relationships between earnings and college education across generations can be largely explained by the transmission of abilities. Notably, the positive relationship between the earnings of fathers and college attendance of sons does not require a role for credit constraints. Intergenerational relationships make it possible to infer the potential earnings of a person for different levels of education. I find that the average return to college is substantially below the difference in average earnings of workers with and without a college education. I consider an intergenerational self-selection model of education. Two distinct abilities are transmitted from parents to their children. One ability is useful in occupations that are obtained after receiving a college education; the other ability is utilized in occupations that do not require prior college training. The members of each generation decide whether to attend college in order to maximize their lifetime earnings. Using a simulated method of moments approach, I estimate the structural parameters of the model with data from the PSID. I am able to estimate the parameters of the model without the assumption made by Willis and Rosen (1979) that parental features affect the educational choice of a son, but are not correlated with unobserved determinants of the son’s earnings. I obtain a positive correlation between skills used by college and high school educated workers, and I counter their finding of no ability bias.Return to education, intergenerational